10 predictions for 2012: Big changes ahead for India

Crystal-ball gazing is an occupational hazard towards the beginning of each New Year. If anyone was really that good at figuring out all that could happen over an entire year, he or she could make a pile.

I haven’t made myself any kind of pile, but here’s my excuse for indulging in it: the purpose of forecasting is not to make precise statements about the future but speculate about what could happen and give it a sense of probability.

So here are my prediction for the year.

India

Mid-term poll: There is a 60 percent chance of a general election being announced if the Congress does well in Uttar Pradesh. This could happen somewhere in October 2012. Without an election, UPA-2 cannot continue to govern – due to internal contradictions and worsening economic situation. For a full list of reasons, read this.

Politicians: Fortunes of politicians? Mayawati will marginally lose UP, but will rule with outside support from either BJP or Congress. Narendra Modi will win his December elections comfortably.

2012 will be better than 2011: surprising changes will unfold. AFP

The economy: India will probably grow at 7 percent next year, but inflation could re-emerge in the second half, especially if pre-election political and social spending start kicking in. The last bout of inflation was kicked off by soaring support prices for food. History could repeat itself in 2012-13, this time to support the Food Security Bill’s procurement requirements.

The rupee: The global risk-aversion should begin abating in the second half of 2012, which means the rupee should start strengthening. The rupee should fall well below Rs 50 to the dollar by end-2012. A return to Rs 44-45 levels is some way off.

The markets: After a weak first-half, the markets will start gathering steam in the second – especially if some reforms are announced in the budget. The Sensex should cross 20,000 by the end of the year and hit a new high by March 2013.

Scams: The black money, tax-havens and export scams will blow up in 2012. The first verdicts in the 2G scam will come in the second half of 2012.

The world

The US: The economy will slow down as the current modest revival is related to monetary looseness and the fact the no politician wants an economy tanking in an election year.

Barack Obama will probably win re-election no matter who the Republican candidate is if the economy seems to be stabilising itself. But if Europe implodes, and brings the US down with it, all bets are off. A lurch to the right is not unthinkable in this event.

Europe: The continent will probably keep muddling along and see a mild to moderate recession in 2012. The euro will survive, and the European Union will stay intact, but the resultant austerity will ensure that Europe will face a lost decade of growth – like Japan.

While German politicians keep resisting the idea of making the European Central Bank play the role of the US Fed in the 2008 Lehman crisis, this could change as some of the southern Club Med countries teeter towards a more drastic recession. Eurozone’s equivalent of the Fed’s QE1 (quantitative easing) will come after the fiscal austerity measures start biting.

Japan: Faced with the prospect of a rising yen and a worsening debt situation, Japan will seek to raise consumption taxes – which is the wrong remedy for an economy that is already putting off consumption. Real reforms will again be avoided – which would be to open up the economy and immigration.

Like in the era of the previous strong yen, when Japanese companies set up manufacturing bases in America and Asia, 2012 will see Japan again doing the same. India could be one early beneficiary.

China: China will slow down, with growth falling below 8 percent, as the economy tries to rebalance itself from an investment and export-driven one to one with greater domestic consumption. There will be no crash – but a steady winding down of growth. Especially when a regime change is on the cards, no one can afford a dramatic slowdown. That may happen in 2013 or 2014.

The yuan will strengthen against the dollar, and more and more countries will work out direct yuan-local currency swaps to shut out the dollar. Japan has already done so, and India has not done so only because the political thaw required for this to take place has not happened. But with the US-Japan-India strategic dialogue taking off, by late 2012, a more confident India would push for a yuan-rupee swap arrangement to reduce settlement in US dollars.

Asset classes

Gold will continue to be a big draw since the current overdependence on the dollar continues to worry everyone. Equity will fare better than other asset classes in the emerging markets, but not in US and Europe. Real estate will pick up in the US, but not in India.

Debt funds are the best bet in India as the interest rate regime peaks and the Reserve Bank of India starts cutting rates.

Lastly, one thing I am willing to bet on is this: 2012 will be better than 2011 for all of us. It will be a year of surprising change.